"Debtless" Housing Boom Leads Household Wealth Recovery

Aggregate housing wealth has increased more than 150 percent since its recent low point in the first quarter of 2009.All data presented is provided by the Federal Reserve Board in the Financial Accounts of the United States. Housing wealth is homeowners’ equity in household real estate, which is calculated as the total value of housing assets minus home-mortgage debt. Aggregate homeowners’ equity was $6.1 trillion at the end of the first quarter of 2009 and $15.4 trillion at the end of the third quarter of 2018. Meanwhile, all other wealth of households and nonprofit organizations has increased just over 80 percent. Both housing wealth (i.e., homeowners’ equity) and total household net worth reached post-recession highs at the end of the third quarter of 2018.

Even though housing wealth has more than doubled since 2009, the value of home mortgages owed by households has actually decreased by $312 billion (about 3 percent). The recent divergence between trends in housing wealth and housing debt is particularly striking because, in the aftermath of the housing bubble, economists largely have assumed there is a positive relationship between mortgage borrowing and house prices.

The debate has been whether:

Excessive mortgage borrowing inflated the housing bubble (in the form of rising house prices)

Less frequently discussed is the possibility that neither hypothesis is valid—namely, that the underlying assumption is incorrect, and house prices and mortgage growth may be unrelated to each other. Yet, that has been the case for the last decade or so as we show below.

Mortgage Borrowing and House Prices before 2007

The simple correlation between the annual growth rates of aggregate home-mortgage debt and the value of the aggregate housing stock was moderately strong and positive (0.65) starting in 1953 and ending in 2006, as seen in the figure below. The correlation is between the annual percent changes of aggregate home-mortgage debt outstanding and the annual percent changes of the aggregate value of households’ real estate. This suggests a close association between mortgage borrowing and house price changes. The existence of a strong correlation does not provide any insight into whether one causes the other, however.

Economists have looked for evidence that causation may run in one direction or the other:

Some believe an increase in mortgage credit availability allows homebuyers to bid up house prices. This is the credit supply view, most prominently espoused by Atif Mian and Amir Sufi in a 2014 book, House of Debt, and other writings.

Others believe rising house prices support greater household borrowing. This is the irrational exuberance view, proposed by economist Robert Shiller in his book of the same name.

A variety of empirical methods have been employed to provide evidence for and against these hypotheses with no clear resolution emerging.

Theories about House Prices and Debt Collapsed with the Bubble

As noted above, recent evidence suggests there may be no connection between changes in mortgage debt and housing values, at least in some time periods. The correlation between annual aggregate mortgage growth and aggregate housing-value changes was small and negative (correlation coefficient of -0.14) between 2007 and 2018, as seen in the figure below. This is not consistent with either causal interpretation.

Most notably, mortgage debt increased significantly in 2007 and 2008, but the aggregate value of the housing stock declined sharply in those years. Conversely, mortgage debt decreased in 2012, 2013 and 2014 but housing values rose briskly.

As indicated by the correlation coefficient being close to zero for this period, there may be little to no relationship at all. Thus, changes in mortgage borrowing are not necessarily—or are not always—tied to house price changes in the same direction.

A Debtless House Price Boom

A commonly held view of the housing bubble is that excessive mortgage growth fueled the price surge. However, other economists believe the opposite: The bubble sentiment created the rising home values (used as collateral) necessary to support rapidly rising mortgage borrowing.

Annual data from the recession (and aftermath) period 2006-18 support neither view. In fact, since 2006, there has been essentially no relationship between the growth rate of mortgage borrowing and the change in value of the housing stock. This period, together with the unresolved nature of the earlier dispute, suggests we still do not have a clear understanding of the relationship between mortgage borrowing and housing values.

Notes and References

1All data presented is provided by the Federal Reserve Board in the Financial Accounts of the United States. Housing wealth is homeowners’ equity in household real estate, which is calculated as the total value of housing assets minus home-mortgage debt. Aggregate homeowners’ equity was $6.1 trillion at the end of the first quarter of 2009 and $15.4 trillion at the end of the third quarter of 2018.

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